He is young, earns well and has just become a father. Just the kind of customer insurance companies want to target. Yet, when Harshad Doshi applied for a policy, his request was turned down. "When I disclosed that I had kidney stones, they refused to insure me," says the Mumbai-based manager in a financial services firm.
Despite the condition, Doshi (see picture below) has managed to buy a Rs 2 crore life cover for himself—not without putting his ailment on record, and disclosing that he had been denied life insurance by another company. "I made full disclosures because I didn't want to leave anything to chance when it came to the claim settlement," he says. Doshi had expected a higher premium, but he was in for a pleasant surprise. The final premium was the same as that charged by the company for a person with normal health. He's paying Rs 23,740 per year for the Click2Protect online term plan from HDFC Life.
Not many insurance buyers are as transparent as Doshi. A sizeable percentage prefers to keep its medical problems under wraps. For some, it's tempting to conceal facts that are likely to push up their premium, or deny them an insurance cover altogether. For others, ignorance is bliss because they let their agents fill up the details. Almost 22% of the respondents to an online survey conducted by Economictimes.com, last week, said they would either not mention their illness or seek the agent's help in concealing it to keep the premium low. Another 8% said they would not disclose the full extent of the problem, and water it down.
Withholding crucial information on the state of your health from your insurance company can have serious ramifications. If an insurance company finds out that a policyholder has concealed information that affects the risk to his life, out goes the claim. Don't expect a company to be lenient because the policyholder's family is without support. Every year, about 2% of the claims received by life insurance firms end up in the trash can. Some are crude attempts to defraud, while others display greater finesse. Yet, policyholders leave behind enough loose ends for companies to reject the claims. In 2010-11, nearly 17,500 death claims were rejected (see details). An equal number of claims is under investigation and some of these might also get rejected. This is just the tip of the iceberg. As our survey shows, up to 30% of insurance buyers submit incorrect information that could lead to rejection of claims.
One of the most common lies in a life insurance application is the disclosure of tobacco use. The premium shoots up by 25-50% if one consumes tobacco in any form. So, it's quite tempting to say that one doesn't smoke or chew gutka to keep it low. However, one should not be lulled into thinking that the lie will get past undetected. Insurance companies have sophisticated ways of finding out if a policyholder has lied in the application form, hidden facts or submitted fake documents. Most companies have a panel of medico-legal experts, who scan the documents submitted with a claim, for any discrepancy or attempt to mislead. For instance, there may be no traces of nicotine in the bloodstream of somebody who kicked the smoking habit 2-3 years ago, but his chest X-ray might have some tell-tale marks of the damage done by smoking.
The most important thing to remember is that you will not be around to do the explaining. It will be your nominee running around to get the sum assured promised under the policy. Will your spouse or children be able to stand up against the legal onslaught of the insurance company? "Buyers must consider whether the money saved on the premium is worth the risk they take when they submit incorrect information that may lead to claim rejection," says Ranjit Rai Grover, director of the Noida-based Amity School of Insurance, Banking & Actuarial Science.
Even if there is a ghost of a chance of rejecting a claim, a company is likely to take the gamble. Private detective agencies are called in to ferret out the medical history of the deceased. Field investigators fan out, inquiring from neighbours, relatives, pharmaceutical stores and hospitals. "In every insurance contract, there is a clause that gives the insurance company (or an agency appointed by it) the authority to access any information from a hospital or clinic where the policyholder was treated," points Santosh Kumar, head of the Ghaziabad-based insurance investigation agency AMS Inform.
According to Section 45 of the Insurance Act, 1938, a company cannot reject a policy saying that the policyholder hid facts after two years of issuing the policy. "The insurer must have documentary evidence of the fraud to reject a claim after two years," says Nutan Tanay, an underwriting professional who has worked with several insurance companies. This is where private spies come into the picture.
Meet Sanjay Singh, who runs a small outfit, Indian Detective Agency, in Delhi. If an insurance company comes across a suspicious claim, it contacts Singh for discreet enquiries into the lifestyle, social habits and medical history of the policyholder. "We even check the leave record of the deceased person to know if he had a medical history," he says. Zubair Ahmed, who heads the Hyderabad-based investigation agency Zubair & Company, says their field staff is trained to gather information from medical stores and clinics in the neighbourhood of the deceased to know if he was on medication, and for how long. There are some 800 such agencies, ranging from one-man outfits to large organisations led by professional sleuths, operating in India.
For insurance firms, the Rs 5,000-10,000 they pay to private investigators is money well spent—it helps them save lakhs of rupees in death benefits. Claims amounting to Rs 336 crore were rejected in 2010-11, 86% more than the claims worth Rs 180 crore rejected just two years ago.
Role of claim settlement ratio
The surge in the number of rejections has led customers to look at the claim settlement ratio of companies before buying an insurance policy. The claim settlement ratio is the number of claims settled by a company out of the total outstanding claims and new cases it received during a specific period. If a company had 2,000 claims pending at the beginning of 2011-12 and received 3,000 more claims during the year, but settled only 4,000 claims, its claim settlement ratio would be 80% (4,000 claims settled out of 2,000+3,000 total claims). An overwhelming 64% of the respondents to our online survey said that they would go by the claim settlement record of the company while buying life insurance.
However, experts say that the buyers who go by the claim settlement ratio may be barking up the wrong tree. They say the claim settlement ratio does not have any bearing on the assessment of a claim. "Claims are assessed on the basis of the merits of a case," says Swapan Khanna, co-founder of insurance research and advisory firm, I-Save. In other words, you can't be sure that a company with a high claim settlement ratio will pass a claim even if there is something suspicious. There is no need to lose sleep if your insurer has a low claim settlement ratio as long as you have honestly disclosed all information. "No company can refuse a genuine claim. The insurance regulator is very strong and pro-consumer in these matters," says Deepak Yohannan, CEO of online insurance portal MyInsuranceClub.com.
The claim settlement ratio itself is a misleading statistic because any claim made within two years of buying the policy (also known as an early claim) is investigated in detail. "An early claim is a warning signal as this could be a deliberate attempt to defraud," says Yateesh Srivastava, chief marketing officer, Aegon Religare Life Insurance. Irda guidelines give a company up to six months to investigate a suspicious claim. However, this usually gets stretched, either because the claimant has not submitted the documents sought by the company or some organisation is not cooperating with the investigation. For new companies, such as Edelweiss Tokio Life Insurance, which started operations only two years ago, all claims will be early ones where the policyholder died within two years of buying the policy. So, new firms will naturally have a lower claim settlement ratio, though it doesn't make them any worse (or better) than older, established players.
The state of a buyer's health is not the only disclosure an insurance company seeks from a buyer. They also see whether the insurance cover is commensurate with his income. Taking too high an insurance cover when your income is low is an indication that the policy has been bought for the wrong reasons. Normally, a company will not offer a cover of more than 10 times the annual income and buyers are asked for their income tax returns as evidence. This queers the pitch for small businessmen, who may have deflated their income while filing tax returns. They take multiple low-value policies from different companies but don't disclose the details. This can be a problem because it gives the insurance company an excuse to hold back the claim, if not outrightly reject it. Nudged by Irda, insurance companies are now sharing their databases to detect such practices.
Your occupation and lifestyle are also important. Sedentary workers with desk jobs are at a lower risk than those who travel a lot during the course of the day. Those working in plants and at construction sites are in the highest risk group. When Ashal Jauhari (see picture) calculated his premium for a Rs 1 crore cover, the premium came to Rs 10,500 per year. However, after he declared that he's a chemical engineer and works in a fertiliser plant, the premium shot up more than 200% to Rs 34,000. "My work entails some risks and, therefore, the premium was hiked," he says. Jauhari ultimately took a Rs 50 lakh cover and plans to continue with the Rs 25 lakh term plan he took some years ago.
Your occupation and lifestyle are also important.
If you indulge in bungee jumping or other extreme sports, be sure to tell your insurance company about it. If something happens to you during an adventure holiday, the insurance company will not give out anything if you had not mentioned your lifestyle when you bought the policy.
Don't avoid the medical test
Most buyers harbour the misconception that a policy which doesn't require medical tests is good for them. Such plans may be easy to buy, but there is a price to be paid for this convenience. An insurance company will charge you a higher premium, factoring in the possibility that some unhealthy lives will also get covered. So, you are paying for the poor health of other customers. On the other hand, a policy that requires you to undergo stringent medical tests will have a lower premium. "The insurance policies that skip medical tests are generally more expensive compared with those that insist on stringent tests. It's best to go for plans that require medical tests," says Sanjeev Pujari, appointed actuary of SBI Life.
The real advantage is that once you undergo a medical test, the responsibility of determining your health condition shifts to the insurance company. Then the insurer cannot reject the claim saying you suppressed the facts.
We have said this before, but it needs to be stressed again. Your insurance policy is the bulwark of your financial plan because it safeguards all other investments and goals. Furnishing incorrect information that can lead to the rejection of the claim is being penny wise, pound foolish. It also defeats the primary objective of buying the insurance policy. So, the next time you buy an insurance policy, make sure you are completely honest in your disclosures and haven't left any loophole for the company to reject your claim.
How claims get rejected
Several red flags pop up during the claims procedure, leading to rejection.
Claim filed by nominee.
Is it within two years of buying the policy?
If Yes: Scrutinise documents and investigate the cause of death.
Was it an accidental death?
If YES:Verify facts about accident.
Probe cause of death, scrutinise papers.
Consult medico-legal experts for opinion.
Is the life cover very large?
Probe possibility of suicide, foul play or terminal disease.
Refer findings of field investigations to a panel of medico-legal experts.
Is there evidence that crucial information was hidden by policyholder?
Pass the claim.
Refer matter to the claim rejection committee.
Is the company willing to incur legal and other costs of rejecting the claim?
If NO:Pay the claim.
If Yes:Reject claim.